How bad loans are undervalued

Author: David Zhao force, serving a particular large banks, Institute of Finance. More than 10 years of macroeconomic research experience, the main research areas include: macroeconomic, monetary policy, financial supervision, commercial banks.

In December, the central economic work conference held soon, over the past year to implement the last Central Economic Work Conference on how the task, the Central Economic Work Conference will be how to set the next year's work tasks. In response, Phoenix Finance published a series of articles to answer this question. Today's second, focusing on commercial banks, non-performing loans. There are many reports on NPL balance and NPL ratio, this article explains in detail from the technical operation angle why commercial banks will do low NPL ratio, and how to do low.
Since the fourth quarter of 2011, the balance of non-performing loans and non-performing loan ratio of commercial banks have entered the rising channel. As of the end of the third quarter of 2016, the CBRC announced the main regulatory indicators, commercial banks, the balance of non-performing loans of 149.39 billion yuan, non-performing loan ratio of 1.76%. At the end of 2011, the NPL balance stood at just over 400 billion, and the NPL ratio was just 1%.
Even if the rise is so rapid, commercial banks, non-performing loans are still considered to be underestimated, the real risk of commercial banks is higher than the book risk. The prime example is the rapid growth of interest-related loans. At the end of the third quarter, the outstanding loans of commercial banks concerned stood at 3.48 trillion yuan, accounting for 4.1% of the total, and the balance grew by 23.6% year-on-year. Loans in accordance with the five classification has five forms: normal, attention, secondary, suspicious and loss, the latter three categories are bad areas. Concerned loans are not bad, but in fact repayment has been difficult, in practice, mainly in less than 90 days of interest on the issue of loans. In order to tie in with commercial banks, to prevent concern loans fall into bad, many companies in the East and West Minato, as far as possible the first interest on, making the loan form as far as possible in the concerned category.

Indeed, there is the possibility of upward migration of interest loans, but also the possibility of downward migration. But think about it, even the interest payments are difficult, more difficult to repay the principal. So concerned about the downward migration of loans, the probability of entering a great bad. If interest loans are included, the NPL ratio of commercial banks will rise rapidly to close to 6%.
Commercial banks on the true quality of assets of different opinions. Oriental Asset Management Company of more than 200 industry survey found that more than 50% of commercial banks in 2016 that the non-performing rate of 2% -3%, more than two percent that will be between 3% -4%, nearly one Into that will be more than 4%. More aggressive foreign institutions, that China's commercial banks has more than 10% of non-performing rate.
To understand the true quality of assets of commercial banks, we must first understand the commercial banks in order to do a low rate of non-performing all efforts? We use "low" rather than "down," because what we are talking about is how to make the quality of assets better through technical operations at a given asset quality.
Whether state-owned commercial banks, joint-stock commercial banks or credit unions, have to do low impulse of non-performing loan ratio. For large financial institutions, the quality of assets related to its reputation, stock prices and regulatory evaluation, for small financial institutions, the asset quality is related to its survival, any adverse rumors of bad assets, are likely to lead to run the wave .
Assets, although there are five classifications, but simply is two baskets, one is a good loan, one is bad loans. Then there are two ways to do low bad, first, the already deteriorating assets are still on the first basket; the second is to deal with the loan basket out, turn out or return to the first basket .
First, the already deteriorating assets are still in the first basket. The above-mentioned enterprises in their own East and West Minato as far as possible the interest also belongs to this category. But the company's own social financing capacity is limited, always to the capital that day, if you do not want these loans fall into bad loans, but also rely on commercial banks to renew loans. Therefore, the commercial banks selectively to some repayment attitude is correct, but the inability of the enterprise to do the new and old risk mitigation treatment. But the specific practices of different banks have different, some banks hold the enterprise must take the bottom line of their own funds to pay interest only on the principal part of the slow release; and some banks are running more than the principal amount of loans in order to cover the principal And interest.
The essence of this type of practice is to extend the duration of the debt to time for space. Local government debt replacement in 2015 (shorter-term loans replaced with longer-term bonds), 2016 began to pilot the debt-to-share are all such ideas.
Second, deal with or transfer the second basket of bad loans. The most traditional approach is to take the clean-up, litigation and auction process, the final part can not be written off to be written off. But this kind of practice costs a lot of manpower and time costs, efficiency is extremely low, the whole cycle may take two to three years, resulting in long-term bad loans on the account, dragging down the performance of the balance sheet.
Therefore, commercial banks try to pack together the non-performing loans with the collateral to the asset management companies. This method can quickly improve the balance sheet, but the drawback is that discounts are too large, usually 20-30% of the original value sold, far lower than the commercial banks expected to deal with, resulting in greater losses of commercial banks.
Thus, another kind of compromise came into being, asset management companies as a channel, commercial banks will sell non-performing assets to asset management companies, the period is usually 3 years, 3 years after the repurchase of non-performing loans and pay the corresponding interest cost. During this period, commercial banks still maintain control over mortgages and can normally collect and dispose of non-performing loans. In other words, commercial banks are still the true holders of nonperforming loans, but the asset is temporarily deposited in the asset management company, and the asset management company to lay a risk-free return as a storage fee. This has the advantage of being able to quickly reduce the commercial bank's non-performing loan balance, and does not affect the disposal of commercial banks proceeds. But the drawbacks are caused by bad loans low, a few years, there is no deal with the success of bad loans but also back to the table.
In addition to write-off and transfer, the third idea is to make the second basket of non-performing loans back to the first basket of good loans. Specifically, commercial banks seek to reorganize the business of non-performing loan enterprises and take nonperforming loans, while the advantages of commercial banks to solve the bad return is to get the commercial bank's financial support.
From the above all kinds of practices, we can see that commercial banks do not have the risk of undervaluation of non-performing loans. However, it is still difficult to accurately assess the extent of undervaluation. Such as renewal of loans is a common phenomenon. Many of the normal operation of the enterprises will be working capital loans to the production and operation of precipitation, it is difficult to pull out, so the normal business needs to renew loans. From the outside point of view, it is difficult to distinguish between what the resumption of loans is the normal production and operation needs, which is to prevent the adverse exposure of the move. While the future trend of non-performing loan ratio also depends on the existence of a wide range of extended debt period to time for the practice of space is effective.


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